Economics

Capitalism, Creative Destruction, and the 2012 Election

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In his 1942 book Capitalism, Socialism and Democracy, the Austrian-born economist Joseph Schumpeter famously likened the capitalist system to a "perennial gale of creative destruction." Capitalism, Schumpeter wrote, "is by nature a form or method of economic change and not only never is but never can be stationary." This dynamic process, he argued, "incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."

Joseph Schumpeter

It was a powerful observation then, and it remains no less relevant to our world today, as the French economist Guy Sorman illustrates in an engaging essay entitled "Schumpeter in the White House" appearing in the latest issue of City Journal. As Sorman observes:

Schumpeter believed that progress in a capitalist economy requires that the old give way constantly to the new: production technologies in a free economy improve constantly, and new products and services are always on offer. But this creative transformation also has a destructive side, since it makes earlier products and services—and the workers who provided them—obsolete. Today's consumers have little reason to buy an oil lamp instead of a lightbulb, or a Sony Walkman instead of an iPod—which can be bad news for the people who manufacture the oil lamp and the Walkman.

Looking back at the history of Western capitalism, we can see how the discovery of new energy sources, new communications systems, and new financial instruments regularly demolished old ways of doing things. When this happened, the result was typically short-term pain, as certain workers found themselves displaced, and sometimes even what appeared to be economic crises; but there was also substantial long-term gain, as the economy became more efficient and productive.

When it comes to explaining Schumpeter and his ideas, Sorman's essay is a great resource. But Sorman stands on shakier ground when he turns his attention to the 2012 U.S. presidential election, which he frames as a partial referendum on Schumpeterian economics. Here's Sorman again:

The 2012 presidential race will be, in part, a showdown between two different models of economic growth. President Barack Obama and his Democratic administration will defend the once-discredited and now-resurgent theory that government must act as the economy's "tutor" and use public funds to stimulate it. The Republican nominee, presumably Mitt Romney, will advance the free-market argument that the main source of new growth is the innovative energy of American entrepreneurs and that government needs to get out of the way.

It's nice to imagine a major party presidential candidate advancing a genuine free-market agenda rooted in the idea of creative destruction—but where's the evidence that this unlikely event will actually occur this calendar year? Sure, Romney and other Republicans will mouth the usual pro-capitalist platitudes, but as my colleague Peter Suderman observed yesterday, "As for gutting government, Republican legislators may talk a big game about federal spending, but that doesn't mean they vote accordingly." And let's not forget that Republican President George W. Bush also used public funds to stimulate the economy. Regardless of how the 2012 election turns out, I'm afraid we won't be seeing Schumpeter in the White House anytime soon.

NEXT: Nick Gillespie on Red Eye w Greg Gutfeld Talking Elizabeth Warren, Mitt Romney, & Less

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  1. It’s hard to imagine a more perfect embodiment of creative destruction’s opposite–actually holding office–than Barack Obama, isn’t it?

    And Mitt Romney may not be the vocal champion of creative destruction we’d like him to be, but he has engaged in some real live creative destruction himself.

    During the 14 years Romney headed Bain Capital, the firm’s average annual internal rate of return on realized investments was a staggering 113 percent.

    http://www.american.com/archiv…..tt-romney/

    That’s called doing creative destruction and doing it well.

    Does that mean I want Mitt Romney running the economy? No, I don’t want anybody running the economy. But in terms of understanding creative destruction, how’s Mittens stack up against Obama, who’s only real world experience seems to have been working as a community organizer?

    In a choice between someone who scored a 113% IRR over 14 years vs. someone who worked his way up in Chicago as a community organizer? That shouldn’t be any contest if you’re looking for a candidate who knows something about creative destruction.

    1. and it is time to drop the pretense that the problem with Obama is that his policies are not working. They are, just as he and his statist colleagues want. In a normal world, presidents think they can spur growth through policy; in this world, there is a president actively seeking to stifle growth.

      Less growth = more dependency on govt, and liberalism can only survive if the looter class is larger than, or similar in size to, the productive class.

      1. Cash 4 Clunkers was the perfect distillation of his economic beliefs.

        Destroy perfectly serviceable cars, (increasing scarcity) to reward a politically connected rent seeker (Detroit automakers) in a way that appears to help a ‘disadvantaged’ group (new car buyers).

        1. Destroy perfectly serviceable cars,

          Gotta give him points for creativity, no? Schumpeter would strongly approve!
          /sargasm

      2. I still know people today who will almost literally scream until they’re blue in the face about how C4C was actually a good idea and a success.

    2. Yeah Ken, supporting TARP is the definition of creative destruction. Keep projecting your hopes onto the right’s Obama, click your heels together three times and maybe you’ll get the policy you want.

      Christ, Warren Buffet could buy and sell Mitt Romney a hundred times, that doesn’t mean I want him as president.

      1. I wasn’t projecting any hopes.

        Say what you want about Romney, but the man has engaged in creative destruction in the most direct way possible–and outperformed just about freakin’ everybody.

        …and that’s a huge difference between him and Barack Obama.

        Sure, there’s just as much blah, blah, blah as the next politician, but how likely do think you Romney is to launch a war against Wall Street like Obama did?

        How likely do you think Romney is to make executive pay one of the cornerstones of his economic policy–like Obama did?

        How likely is Mitt Romney to think that creative destruction is the cause of our economic problems–and should be thwarted at all costs?

        Not very likely.

        I’m not saying Romney’s my kind of capitalist. I’m not saying he’s a libertarian.

        But there’s a huge fundamental difference between Barack Obama and Mitt Romney–and the difference may not be something popular. But if ever we’ve needed someone who actually knows something about creative destruction in the White House, it’s right freakin’ now.

        A capitalist who’s actually shut down and liquidated companies for being hopelessly unprofitable? In the White House?!

        Am I dreaming? How much more can we reasonably hope for right now? Compared to what we’ve got?

        1. A capitalist who’s actually shut down and liquidated companies for being hopelessly unprofitable? In the White House?!

          You’re going to vote for Warren Buffett? I’m confused.

          You can’t seem to realize that politicians can be oh so capitalist when their own money is at stake, but behave completely different in office. TARP comes to mind.

          How likely is Mitt Romney to think that creative destruction is the cause of our economic problems–and should be thwarted at all costs?

          I hate the way TARP was administered, but I can tell you that we were on a precipice unlike anything we have known before in modern history with the potential of a complete collapse of our currency system and our financial system. Had we not taken action, you could have seen a real devastation

          Very likely indeed.

          1. TARP was one of the worst things the Obama Administration did, but it wasn’t the only rotten thing they did.

            And as bad as TARP was, there were things that done differently wouldn’t have made it as bad.

            For instance, rather than refusing to let money be paid back, they could have let the banks pay it back whenever they wanted.

            Obama used the fact that the banks had our money as a justification to remake Wall Street in Barack Obama’s image…

            Would Romney have done that? I don’t think so.

            I tell you something else that made TARP even more awful than it needed to be. Instead of using the TARP money that was paid back to the government to buy back the debt the government floated to finance TARP? The Obama Administration resspent the money as soon as it was paid back!

            Would Romney have done that? I don’t know, but if he wouldn’t have? That’s another way in which having Romney for the next four years would be better than having another round of Obama.

            I’m as clear as anybody on the fact that Romney is imperfect. But because–just like Obama–he isn’t a libertarian style capitalist the way I am? Doesn’t mean he’s just like Obama.

            Romney is waaaaaaaaaaay better than Obama on capitalism, and that’s the issue that matters the most to me. It’s a huge difference, and papering over that difference with the observation that Romney, with reservations, supported the idea of TARP itself like Obama did? Completely misses all the important differences between them.

            1. I thought we were talking about creative destruction.

              Sorry, but for all these supposed differences support for TARP and Romneycare are unforgivable to me. I don’t care if they’re a world apart the things that Mitt Romney supports I find morally abhorrent.

              You mentioned that you’re not projecting your hopes on anyone, but if you read your post you do exactly that. A couple times you mention that you don’t know what Romeny would do in a situation but that it would be way better because, for some reason, you’re sure that he would do as you would hope.

              1. Not that he would do as I hope.

                I think his basic premises are fundamentally different from Obama’s.

                I think Obama assumes that free market capitalism is a bad thing and should be dampened if not stopped. …I think that ObamaCare and his economic programs have all reflected that bias.

                I do not think Romney assumes that free market capitalism is a bad thing. Rather I think he thinks it’s a good thing. While I recognize his imperfections, I don’t see why his fundamental bias being different than Obama’s wouldn’t result in policy that’s different from Obama’s, too.

                That’s not projecting hope. That’s being sensible. The option where we get a vocal, true to the wall capitalist in the White House isn’t on the table. I’m not about to vote for Romney–or anyone else.

                But just because Obama and Romney are the same in certain ways regarding capitalism, doesn’t mean they’re the same. In my preference for libertarianism and free market capitalism, I’d hate to think I dissuaded anyone from voting against Obama because they thought Romney wasn’t really any better on capitalism.

                Romney is better.

                1. “I’m not projecting hope because Romney really is better”

                  “How do you know Romney is better?”

                  “Because I think he thinks like I would like him to think!”

                  Isn’t that a bit of question begging?

                  1. No, that’s a straw man.

                    Romney’s record of engaging in creative destruction to great success, on the other hand, that’s a fact.

                    Obama acting in harmony with his visceral hatred of capitalism? That’s a demonstrated fact, too.

                    1. Incidentally, another fact is Romney’s criticism of the stimulus.

                      When you get down to the bottom of TARP, the TARP money that the banks paid back to the government? That was the essence of the stimulus money. Instead of using the paid back money to buy back all the ten-year notes they floated to pay for TARP, the Obama Administration used that money on the stimulus–which was a disaster.

                      If the paid back TARP money had been used to pay down the debt floated to pay for TARP in the first place? The damage would have been minimal. Romney’s opposition to that is a matter of record–that’s a big chunk of what he complains about when he complains about TARP.

                      But the big loss … and this is of course what a lot of folks are doing is diverting attention from the real failure of this last year, this lost year, where President Obama and Congress spent $787 billion dollars and got nothing to show for it.

                      —Mitt Romney

                      http://www.thepoliticalguide.c….._Stimulus/

                      That isn’t speculation on my part, either.

                      Romney supported TARP. I hated it. But TARP would have been very different if Romney had been president–a lot better than it was under Obama. And Romney wouldn’t have used that paid back money to turn around and squander it on stimulus, either.

                    2. TARP isn’t bad because of how it was structured it was bad because it existed at all.

                    3. Not to mention that it doesn’t seem that Romney was against the stimulus just what the stimulus spent money on:

                      The spending portion of the stimulus should be limited to those things which are urgently needed and which we had already planned to buy in the future. Infrastructure projects will be included, but because they invariably face delays for engineering, environmental reviews and contracting, they can take a long time to actually boost the economy. They should be part of the picture, but not the whole canvas.

                      I would like to see a significant portion of new spending to be devoted to the maintenance, repair, replacement and modernization of our military equipment and armament. Since the 1990’s dismantling of our military, we have tended to live off the assets that had been purchased in the past. These have been extensively employed in two Gulf wars and in Afghanistan. Bringing forward needed replacement and repair will boost the economy, enhance our national security, and importantly aid our men and women in uniform.

                      I would also add spending for energy research and energy infrastructure. Energy independence is an economic and strategic imperative.

                      A difference of degree, not kind.

                    4. After rereading your posts, I don’t feel that I am mischaracterizing your argument. But we’ll just have to agree to disagree on that point. I still haven’t seen anything from you, other than your opinion, that convinces me that Romney would govern differently from Obama.

                      You still haven’t addressed the fact that Mitt Romney is all for creative destruction when it financially benefits him, like Warren Buffett, but his policy positions are antagonistic towards it.

    3. I am continually amused by this charming, childish faith that Romney’s business experience will somehow translate into a different sort of governance.

      Most of the problems in the United States are the product of an out of control civil service.

      Romney’s track record in MA, his lack of a power base in DC all point to an inevitable cooption by the civil service. Where once they manipulated Obama by stroking his ego and engaging in race/class baiting arguments, they will provide Romney with powerpoint presentations bursting with charts and spreadsheets “proving” that the course they want to take is the optimal one.

      And all the free-market lovers who wasted their time voting for him (as opposed to more productive pursuits like picking lint out of their belly-buttons) will be grousing about what a disappointment he is, or cursing the culture of DC for coopting him.

      1. It really does seem that after constantly shifting back and forth between team red and team blue as being the best solution, that the voters would finally come to conclude that they are both the problem. The general public really are so dumb that it’s hard to not be depressed most of the time, for anyone who thinks objectively.

      2. I am continually amused by this charming, childish faith that Romney’s business experience will somehow translate into a different sort of governance.

        But, but…!

        TARP is creative destruction!

        Romneycare is capitalism!

        Medicare and Social Security are free market and must never be touched!!

        If only the economic nitwit LIBRULZ would realize these FACTS our country wouldn’t be in such a mess!

        /wingnut

      3. I am continually amused by this charming, childish faith that Romney’s business experience will somehow translate into a different sort of governance.

        To what extent do you think Obama’s complete and utter lack of any private industry experience whatsoever made him so completely hostile to capitalism and free markets?

        Pointing out Obama’s deficit, is that childish faith as well, or is it only childish faith to point out that Romney doesn’t have that problem?

        1. No, Ken, you are being childish in assuming that Romney’s policies towards Wall Street would be significantly different than Obama’s.

          Mitt Romney is spineless. He will do whatever is popular, with some modifications based on utilitarian calculations.

          I should point out that Obama isn’t waging war on Wall Street; he is cartelizing it, to the benefit of the established firms.

          And, given Mitt’s assistance in further cartelizing the Health Insurance market here in MA, it’s pretty clear he really has no philosophical objections to the practice.

          Mitt or Obama, it doesn’t really matter, the policies will stay much the same.

          1. I should point out that Obama isn’t waging war on Wall Street; he is cartelizing it, to the benefit of the established firms.

            How quickly we forget.

            You think Goldman Sachs wouldn’t like to stop being a holding company?

            You’re assigning a nefarious motive to Obama when the simple explanation of incompetence would do just as well.

          2. And, given Mitt’s assistance in further cartelizing the Health Insurance market here in MA, it’s pretty clear he really has no philosophical objections to the practice.

            I’m not saying that Mittens is philosophically pure.

            I’m saying that his biases on finance and Wall Street are fundamentally superior to Obama’s.

            The independent investment banks are hamstrung–there are no more independent investment banks.

            They used to be the flagships of creative destruction in America. The innovation and creative destruction of the ’80s, ’90s and 2000’s was all recognized, understood, financed and monetized by investment banks, and they’re gone now.

            If JP Morgan can’t lose a bet affecting 1% of its profit margin without provoking a congressional investigation–then excuse me for pointing out that having an equity guy in the White House is better than having someone whose primary concern about Wall Street was, is, and always will be executive pay!

            1. Here, some people may need a reminder as to how bad Obama was before the Tea Party put the fear of Jesus into Obama.

              The Obama administration plans to order companies that have received exceptionally large amounts of bailout money from the government to slash compensation for their highest-paid executives by about half on average, according to people familiar with the long-awaited decision.

              In making the ruling, the administration’s “pay czar,” Kenneth R. Feinberg, will be inserting the government as never before into pay decisions traditionally made in corporate boardrooms. His decree, which is expected to be announced by the Treasury Department on Thursday, will culminate a months-long review prompted by public outrage over outsize paydays at failing companies saved with taxpayer money.

              —-Washington Post, October 22, 2009

              http://www.washingtonpost.com/…..02719.html

              Incidentally, participation in TARP was not optional. And paying the money back without the government’s permission was expressly against the law. The reason they forced that money in was so Obama could go on the record beating up the investment banks.

              It’s shocking to find that so many libertarians still believe the Obama Administration propaganda…

              Hugo Chavez wouldn’t have gone much farther. I don’t think I’m going out on a limb when I say that Romney wouldn’t have been anywhere near as stupid.

    4. The biggest problem I have with Romney is that, like most republicans, he isn’t interested in actually helping the economy of the US as he did with BC. He is only interested in large corporations making that sort of return at the expense of the American public. Making money by any underhanded means possible is not, in any way, similar to making a government (which should be NOT FOR PROFIT) work effectively. And with the way he lies through his teeth, I can’t believe the profits of BC where honestly won, if he had anything to do with them.

      Plus the fact that he is very interested in turning this country into a cross between a theocracy and a corporatocracy, both of which would certainly be destructive to this country, but not at all “creative”. Obama may not have the experience (although he certainly has gained a LOT over the last 4 years), and I may not agree with the liberals view on the best way to run a government, but at least they are more or less honest about their goals. A sure way to tell if a republican is lying is to see his/her lips moving. Anyone who placates the far Religious selfRIGHTeous and who is delusional enough to believe such childish fairy tales shouldn’t be running one of the most powerful nations in the world.

  2. Hey, look! Amazon’s selling the Kindle version of Ron Paul’s The Case for Gold for a penny.

    1. If only someone were coming out with a new book on Ron Paul and his Revolution…

      1. Seems to me there was something. Can’t think what it was, though.

      2. But wait…it’s…it’s BRIAN DOHERTY to the rescue!

  3. This dynamic process, he argued, “incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.

    Yes, and that is very bad, because we could all still be having this conversation by letter mail, written by pencils, and delivered on horseback.

    1. The horse shoers’ union likes this.

    2. He isn’t saying this is necessarily bad. Actually quite the contrary. This process is what generates progress in a society. It is the opposite that causes stagnation. This is the whole point of at least this article, as far as I can tell. I haven’t read Schumpeter’s book, but I dare say he would say the same thing. Sorman only points out that it can be painful, not that it is bad.

  4. Go ahead and take the time to register at the Seattle Times’ site if you would like to add to comments like this:

    Something is definitely wrong when the richest country in the world has to look to the private sector to continue important space exploration because our government can’t afford it.
    I guess it’s official. National pride is dead.

    http://community.seattletimes……name=mbase

    1. While we are at it, we might as well also sign up for the Portlandia Gazette.

  5. Oops, wrong thread.

    1. Don’t worry sage, cross posting and thread hijacking are perfectly legit here at Reason.

  6. The commercials for BO we’re already getting blanketed with here in W.PA are trumpeting Romney’s creative destruction like there’s no tomorrow.

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